The fighting is the worst in South Sudan since it won independence from Sudan in 2011

* Juba says detainees could join talks if held in city

* Peace talks in Addis in limbo over detainees' release

* World's newest state on the brink of civil war (Adds detainees back peace talks - IGAD envoys)

By Aaron Maasho and Carl Odera

ADDIS ABABA/JUBA, Jan 8 (Reuters) - South Sudanese rebels rejected a government plan on Wednesday to end a dispute over detainees and unblock peace talks aimed at halting violence that has killed at least 1,000 people in the world's youngest state.

Three weeks of fighting, often along ethnic faultlines, has pitted President Salva Kiir's SPLA government forces against rebels loyal to former vice president Riek Machar and brought the oil-exporting nation close to civil war.

Both sides met face-to-face for the first time on Tuesday in Addis Ababa in a bid to agree a ceasefire but faced new delays after Kiir refused a rebel demand to release 11 detainees, who were arrested last year over an alleged coup plot.

On Wednesday, the government proposed to shift the peace talks to the United Nations compound in Juba, enabling the 11 detainees to attend the negotiations during the day and return to custody in the evening.

Taban Deng Gai, the head of the opposition delegation at the Addis Ababa talks, said Juba was not a good venue. "I don't think that will be accepted from this side because Juba is a big prison," he said.

The fighting is the worst in South Sudan since it won independence from Sudan in 2011 in a peace deal that ended one of Africa's longest civil wars. It has also displaced more than 200,000 people and cut oil exports.

Both sides reported fighting around Bor, north of Juba, on Wednesday.

GARANG BOYS

Both sides had been due to discuss their positions on Wednesday but this did not take place because the delegates were awaiting the return from Juba of envoys of the Intergovernmental Authority on Development (IGAD), a regional grouping of east African nations that initiated the talks.

The envoys had travelled to Juba where they tried in vain to persuade Kiir to free the detainees and they arrived back in the Ethiopian capital on Wednesday evening.

In a statement, the envoys said both Kiir and the detained politicians had expressed their support for the talks on an unconditional cessation of hostilities.

The detainees "further stated that their status as detainees should not be an impediment to reaching an agreement on cessation of hostilities," the envoys said in their statement.

Peter Biar Ajak, Executive Director of the Juba-based Center for Strategic Analyses and Research, said most of the 11 detainees were not outright Machar supporters, but part of a group made up of ex-comrades of the late Sudanese liberation hero John Garang, known as the "Garang Boys".

"You are not going to have a lasting solution without this group being involved," Ajak told Reuters by phone, adding that Machar would need the backing of the group to have any hope of gaining wide support outside his own Nuer ethnic group.

The rebels had initially demanded the release of the detainees before the talks, but have since agreed to negotiate a ceasefire and the status of the detainees.

Asked whether Machar's representatives would quit the Addis talks if the detainees were not freed, Mabior Garang, spokesman for the delegation, said: "It is a decision that we will have to make as a group."

FIGHTING NEAR BOR

Lul Ruai Koang, military spokesman for the opposition, told journalists in Addis that rebel forces had attacked government troops near the town of Bor, near the capital.

Koang said his troops were near Juba and would await a command from the rebels' political leaders to attack the town if the peace talks break down. "We are ready, and once we are told what to do we'll get into action," he said.

In Juba, the government's military spokesman Philip Aguer said there had been fighting around Bor and elsewhere, including the Upper Nile state where some oil fields are located.

Politician David Yau Yau, who has in the past led a rebellion against South Sudan's army in the vast Jonglei state has joined the government troops, Aguer said. Yau Yau was not immediately available to comment.

The lack of progress in the peace talks has unnerved foreign powers who worry about a descent into full-blown civil war.

China, the biggest investor in South Sudan's oil industry through state-owned Chinese oil giants National Petroleum Corp (CNPC) and Sinopec, called on Monday for an immediate ceasefire. The unrest has forced the government to cut oil production by about a fifth.

All of landlocked South Sudan's oil is piped through its northern neighbour, providing vital hard currency in transit fees for Khartoum. Oil major BP estimates that South Sudan holds sub-Saharan Africa's third-largest reserves.

(Additional reporting by Pascal Fletcher in Johannesburg; Writing by James Macharia; Editing by Gareth Jones)